Category: Equitablog

Weekend reading: Wealth taxes, the State of the Union, engineers, and more

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Thomas Piketty caused a bit of a stir within economics when he called for a 3 percent global wealth tax in his book “Capital in the Twenty-First Century.” But now, more than a year later, parts of the economics profession seem to be engaging more with the idea of a tax on wealth. One session at the Allied Social Science Associations annual meeting last week is a good example of this trend.

Wage and earnings inequality can be very abstract concepts and seem detached from the real world at times. A “worker at the 30th percentile” isn’t something we all naturally think of. In a new interactive, Kavya Vaghul, Austin Clemens, and John Schmitt explore how earnings inequality looks once we consider the race, gender, and occupations of workers.

The vast majority of the studies on the effects of raising the minimum wage investigate how it affects workers. But it influences outcomes for firms as well. A new study looks at what happens to the flow of firms after a minimum-wage hike, with quite interesting results.

Speaking of the behaviors of firms, the declining business startup rate in the United States has increasingly become a subject of worry. And not only are there fewer startups, but they aren’t growing as quickly as before. New research indicates it’s because firms are hiring less once they become more productive.

Tuesday night, President Obama delivered his final State of the Union address, in which he noted the improvements in the U.S. economy. But as Heather Boushey notes, the economy is a bit like an inkblot in a Rorschach test these days.

Many studies of intergenerational mobility focus on earnings, particularly for men, due to data issues. But a new study, highlighted by Bridget Ansel, looks at how educational attainment is passed along three generations of women.

The D.C. Council is currently considering a bill that would implement a universal paid leave system in the District. The council met on Thursday to consider the legislation and Heather Boushey testified on the economics of paid leave.

The third installation of Equitable Growth’s “History of Technology” series was published this week. Adelheid Voskuhl of the University of Pennsylvania takes a look at how the transformation of the engineering profession during the Second Industrial Revolution can inform the changes we’re seeing during the “Fourth” Revolution.

Links from around the web

Prominent venture capitalist Paul Graham recently published an essay about inequality and its relative merits that received a considerable amount of feedback. He argues that inequality is a necessity for economic growth and innovation. Jim Tankersley writes that the economics research is starting to show perhaps the exact opposite is true. [wonkblog]

In a continuing series about the influence of changing demographics on the economy, Matthew Klein highlights four major reasons to believe that demographics are not destiny when it comes to inequality, the bargaining power of labor, and inflation. [ft alphaville]

The Federal Reserve has started its “normalization” process of raising interest rates, but the pace has yet to be determined. Carola Binder argues the central bank should be aware of the ways its actions affect inequality and how inequality affects how monetary policy is conducted. [quantitative ease]

Labor market statistics are necessarily aggregations, and that includes when we try to slice statistics like the employment rate by age. But according to analysis by Josh Lehner, if you are under 55, you’re less likely to have a job today than a worker the same age in 2000. [oregon economic analysis]

The declining labor force participation rate in the United States has been one of the most important economic trends of the last several years. The causes of the trend are multifaceted and economists are still untangling them. But why do people say they are out of the labor force? Timothy Taylor investigates. [conversable economist]

Friday figure

Figure from “Exploding wealth inequality in the United States” by Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley.

New: Our third “History of Technology” report, and a testimony on paid family leave

Posted on by David Hudson
In case you missed it, Equitable Growth published the third report in our “History of Technology” series yesterday: “Engineering, industrialism, and socioeconomic orders in the Second Industrial Revolution.”

The new report explores the technological and economic change that accompanied the emergence of the engineering profession around the turn of the 20th century.

This analysis may give U.S. policymakers today some scope to understand how the merger of different types of engineering professions may affect innovation, economic growth, and changes in the U.S. workforce—which, in turn, may help or hinder more equitable economic growth.

Read the full report here.

Also yesterday, Heather Boushey—Executive Director and Chief Economist here at Equitable Growth—testified before the D.C. Council on the Universal Paid Leave Act of 2015. In her testimony, she highlighted the following key points:

  1. Paid family leave is a necessary policy for modern families.
  2. Family economic security is important for our overall economic strength and stability.
  3. Localities—like the District of Columbia—should consider action because neither private employers nor federal policymakers have thus far addressed this urgent economic issue.
  4. There are models from three states that have led the way that show paid family leave is good for the economy.

Read her full testimony here.

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Must-reads: January 15, 2016

Posted on by Brad DeLong

Must-read: Barry Eichengreen: “Reforming or Deforming the Fed?”

Posted on by Brad DeLong

Barry Eichengreen: Reforming or Deforming the Fed?: “Proposals for a ‘Taylor rule’ are… merely a formula purporting to explain…

…why the Fed set its policy interest rate as it did in the 1980s and early 1990s, the period Taylor considered in his original study… a guide for desirable policy only if one thinks that the policies followed in that period were desirable, or, more to the point, that similar policies will be desirable in the future. It provides no direct way to address other concerns, such as financial stability, which most people will agree should, in light of recent events, figure more prominently in monetary-policy decisions.

Must-read: Paul Krugman: “Strangely Self-Confident Permahawks”

Posted on by Brad DeLong

Must-Read: Paul Krugman: Strangely Self-Confident Permahawks: “An odd thing about permahawks…

…They are, by and large, free-market acolytes who insist that markets know best; yet they also insist that we ignore financial markets that have been telling us that inflation is quiescent and the U.S. government is solvent…. It’s OK to conclude that markets are currently wrong, although if you believe that they make huge errors that should influence your views on policy in general. But your confidence in your dismissal of market beliefs should bear some relationship to your own track record. If you’ve been warning about inflation, wrongly, for six or so years, and markets current show no worries about inflation… I would expect some diffidence….

But I’m not Martin Feldstein.

Marty Feldstein: A Federal Reserve Oblivious to Its Effect on Financial Markets: “The sharp fall in share prices last week was a reminder of the vulnerabilities created by years of unconventional monetary policy…

…t was inevitable that the artificially high prices of U.S. stocks would eventually decline. Even after last week’s market fall, the S&P 500 stock index remains 30% above its historical average. There is no reason to think the correction is finished. The overpriced share values are a direct result of the Federal Reserve’s quantitative easing (QE) policy…. The strategy worked well. Share prices jumped 30% in 2013 alone and house prices rose 13% in that year. The resulting rise in wealth increased consumer spending, leading to higher GDP and lower unemployment. But excessively low interest rates have caused investors and lenders, in their reach for yield, to accept excessive risks…. As the Fed normalizes interest rates these prices will fall. It is difficult to know if this will cause widespread financial and economic declines like those seen in 2008. But the persistence of very low interest rates contributes to that systemic risk and to the possibility of economic instability….

Moreover, the Fed is planning a path for short-term interest rates that is likely to raise the rate of inflation too rapidly…. The danger is that very low interest rates in this environment would lead to a higher rate of inflation and higher long-term rates. The Fed could prevent that faster rise in inflation by increasing the federal-funds rate more rapidly this year and next. Fed officials also make the case that stimulating the economy by continued monetary ease is desirable as protection against a possible negative shock—such as a sharp fall in exports or in construction—that could push the economy into a new recession. That strategy involves unnecessary risks of financial instability. There are alternative tax and spending policies that could provide a safer way to maintain aggregate demand if there is a negative shock. The Fed needs to recognize that its employment goals have essentially been reached and that the inflation rate will reach its target of 2% in the foreseeable future. The economy would be better served by a more rapid normalization of short-term interest rates.

Must-read: Janet Currie: “The Great Recession and the Health of Mothers”

Posted on by Brad DeLong

Must-Read: Janet Currie: The Great Recession and the Health of Mothers: “Studies of the effects of economic fluctuations on health have come to wildly different conclusions…

…This may be because the effects are different for different groups. Using US data, this column looks at the health consequences of the Great Recession on mothers, a sub-population that has thus far been largely neglected in the literature. Increases in unemployment are found to have large negative health effects and to increase incidences of smoking and substance abuse among mothers. These effects appear to be concentrated on disadvantaged groups such as minorities, and point to short- and long-term consequences for their children.

Must-read: Łukasz Rachel and Thomas D. Smith: “Towards a Global Narrative on Long-Term Real Interest Rates”

Posted on by Brad DeLong
Graph 30 Year Treasury Inflation Indexed Security Constant Maturity FRED St Louis Fed

Must-Read: Łukasz Rachel and Thomas D. Smith: Towards a Global Narrative on Long-Term Real Interest Rates: “Many candidate explanations for the low level of real interest rates have been put forward…

…Less progress has been made on bringing together the different hypotheses into a unifying framework, on quantifying their relative importance and on predicting the future path for real interest rates. This column attempts to fill that gap, and suggests that persistent shifts to global desired savings and investment are behind the bulk of the fall in real interest rates. Those trends are unlikely to unwind anytime soon, so that the global equilibrium rate is likely to remain low, perhaps settling at or below 1% in the medium to long-run.

Must-read: Narayana Kocherlakota: “Information in Inflation Breakevens about Fed Credibility”

Posted on by Brad DeLong
Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed

Must-Read: Narayana Kocherlakota: Information in Inflation Breakevens about Fed Credibility: “The ten-year breakeven refers to the difference in yields between a standard (nominal) 10-year Treasury and an inflation-protected 10-year Treasury (called TIPS)…

…The five-year breakeven is the same thing, except that it’s over five years…. The five-year five-year forward breakeven is defined to be the difference between the 10-year breakeven and the five-year breakeven… shaped by beliefs about inflation over a five year horizon that starts five years from now… conceptually… the sum of… 1. investors’ best forecast about what inflation will average 5 to 10 years from now, [and] 2. the inflation risk premium over a horizon five to ten years from now…. My own assessment is that both components have declined. But my main point will be a decline in either component is a troubling signal about FOMC credibility.  

It is well-understood why a decline in the first component should be seen as problematic for FOMC credibility. The FOMC has pledged to deliver 2% inflation over the long run…. A decline in the first component of breakevens signals a decline in this form of credibility…. A decline in the inflation risk premium means that investors… increasingly see standard Treasuries as being a better hedge…. But Treasuries are only a better hedge than TIPs against macroeconomic risk if inflation turns out to be low when economic activity turns out to be low…. [Thus] a decline in the inflation risk premium… reflects investors’ assigning increasing probability to a scenario in which inflation is low over an extended period at the same time that employment is low….

In the world of policymaking, no signal comes without noise.  But the risks for monetary policymakers associated with a slippage in the inflation anchor are considerable.   Given these risks, I do believe that it would be wise for the Committee to be responsive to the ongoing decline in inflation breakevens by reversing course on its current tightening path.

Must-read: Dani Rodrik: “The Evolution of Work”

Posted on by Brad DeLong

Must-Read: Dani Rodrik: The Evolution of Work: “Thanks to the Industrial Revolution, new technologies in cotton textiles, iron and steel, and transportation delivered steadily rising levels of labor productivity for the first time in history….

…First in Britain in the mid-eighteenth century, and then in Western Europe and North America, men and women flocked from the countryside to towns to satisfy factories’ growing demand for labor. But, for decades, workers gained few of the benefits of rising productivity. They worked long hours in stifling conditions, lived in overcrowded and unsanitary housing, and experienced little growth in earnings. Some indicators, such as workers’ average height, suggest that standards of living may have even declined for a while. Eventually, capitalism transformed itself and its gains began to be shared more widely… partly because wages naturally began to rise as the surplus of rural workers dried up. But, equally important, workers organized themselves to defend their interests. Fearing revolution, the industrialists compromised. Civil and political rights were extended to the working class….

The post-industrial economy opened up a new chasm in the labor market, between those with stable, high-paid, and fulfilling services jobs and those with fleeting, low-paid, and unsatisfying jobs. Two factors determined the share… the education and skill level of the workforce, and the degree of institutionalization of labor markets in services…. There is both good and bad news for the future of work in developing countries. Thanks to social policy and labor rights, workers can become full stakeholders in the economy much earlier in the process of development. At the same time, the traditional engine of economic development–industrialization–is likely to operate at much lower capacity. The resulting combination of high public expectations and low income-producing capacity will be a major challenge for developing economies everywhere.